Bond mathematics and investor psychology

Bond mathematics and investor psychology

One of the topics we often write about is bond mathematics and how you can use it to your advantage – whether it be yield-to-worst versus yield-to-maturity (i.e. the additional accrual from a non-called instrument) or perhaps the power of the pull to par and the returns that can be generated despite increased market volatility.


One part of bond math that has really caught our attention these past few months is what all-in yields do when it comes to ratios, whether it be spread or indeed yield. The chart below shows the yield of EUR high yield versus EUR investment grade on a ratio basis. It shows that you can currently earn around 11x the yield in EUR investment grade (0.25%) if you invest in the EU high yield equivalent (2.75%). We find the statistic truly remarkable and it’s certainly a ratio which the market has never encountered before when it comes to these two asset classes. Why do we think this is important?


Aside from the difference in yield levels, we think investor psychology might find the pick-up too hard to ignore in the current hunt for yield, particularly when you factor in the fact that you find a drop in duration (i.e. interest rate risk) by moving from one to the other, not to mention the dearth of ‘real yield’ on offer within fixed income. 2020 taught us the importance of investor psychology and the benefits of taking advantage of it as the market swung from greed to fear and (what feels like) back to greed again. Perhaps yield ratios are just another piece of that investor psychology waiting to be discovered in 2021.  



Source: ICE Bank of America. Data to 18/12/2020.

Mark Benbow

Investment Manager, Fixed Income

Mark Benbow is an investment manager in the Fixed Income team. 

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